Does Your Cell Phone Reimbursement Policy Fit the Bill?

Many churches and ministries question whether their current reimbursement policies are sufficient for employees who use cell phones for ministry business. The federal taxing authorities offer guidance for providing and reimbursing employees for business-related cell phone usage.

The ministry provides the cell phone and includes employees on its cell phone plan (less common).

The ministry reimburses an employee’s cost of a personal cell phone and plan (more common).

When first introduced, the general public did not widely use cell phones. However, the Internal Revenue Service (IRS) recognized the potential they had for personal use, so they categorized cell phones as “listed property.” Proof of usage criteria were high and the IRS required individuals to include the “personal use” portion in their income. This changed in 2010 when Congress removed cell phones from “listed property” as a part of the Small Business Jobs Act, thus eliminating the stricter proof of usage requirements for cell phones.

Employer-Provided Cell Phones

In a new 2011 notice (IRS Notice 2011-72), the IRS designated an employer-provided cell phone as a working condition fringe benefit. When churches or other ministries provide their employees with cell phones for the convenience of the employer or its customers/congregants, the value of the cell phone typically will not be included in the employee’s taxable income. In a similar manner, any personal use would likely be considered a de minimis fringe benefit that also is not taxable in employee wages.

IRS Notice 2011-72 provides the following examples of noncompensatory business reasons:

The employer’s need to contact the employee at all times for work-related emergencies.

The employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office.

The employee’s need to speak with clients located in other time zones at times outside of the employee’s normal work day.

The 2011 notice is intended to make tax-free treatment available without burdensome record keeping requirements for employers that provide cell phones to their employees or reimburse their employees for business use of their personal cell phones. The notice only applies to employer-provided cell phones that are provided for noncompensatory business reasons. If an employer provides cell phones to reward an employee, the IRS generally considers such arrangements taxable.

Cell Phone Reimbursement to Employees

Many times, a church requires employees to use their personal cell phone to take calls from the church or others within their ministries. In these cases, the church may reimburse the employee for all or a portion of the monthly expense of the cell phone.

IRS Notice 2011-72 did not specifically address the issue of reimbursing employees for the business use of their personal cell phones. However, the IRS issued audit guidance to their examiners, instructing them to analyze reimbursements in a manner that is similar to the approach described in that notice.

Required Documentation

It is unclear from IRS communications what documentation churches and ministries should maintain when reimbursing employees for the use of their cell phones. It may be prudent to follow the record-keeping best practices for “accountable plans” described in IRS Publication 535. This requires employees to submit copies of cell phone bills to their employers within 60 days of the incurred monthly expense.